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Stock prices' long memory in China and the United States

Zhengxun Tan (Hunan Normal University, Changsha, China)
Yao Fu (Hunan Normal University, Changsha, China)
Hong Cheng (Hunan Normal University, Changsha, China)
Juan Liu (Hunan Normal University, Changsha, China)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 17 December 2020

Issue publication date: 19 May 2022

272

Abstract

Purpose

This study aims to examine the long memory as well as the effect of structural breaks in the US and the Chinese stock markets. More importantly, it further explores possible causes of the differences in long memory between these two stock markets.

Design/methodology/approach

The authors employ various methods to estimate the memory parameters, including the modified R/S, averaged periodogram, Lagrange multiplier, local Whittle and exact local Whittle estimations.

Findings

China's two stock markets exhibit long memory, whereas the two US markets do not. Furthermore, long memory is robust in Chinese markets even when we test break-adjusted data. The Chinese stock market does not meet the efficient market hypothesis (EMHs), including the efficiency of information disclosure, regulations and supervision, investors' behavior, and trading mechanisms. Therefore, its stock prices' sluggish response to information leads to momentum effects and long memory.

Originality/value

The authors elaborately illustrate how long memory develops by analyzing not only stock market indices but also typical individual stocks in both the emerging China and the developed US, which diversifies the EMH with wider international stylized facts and findings when compared with previous literature. A couple of tests conducted to analyze structural break effects and spurious long memory demonstrate the reliability of the results. The authors’ findings have significant implications for investors and policymakers worldwide.

Keywords

Acknowledgements

Funding: This work was supported by the National Natural Science Foundation of China [grant number: 71773035].

Citation

Tan, Z., Fu, Y., Cheng, H. and Liu, J. (2022), "Stock prices' long memory in China and the United States", International Journal of Emerging Markets, Vol. 17 No. 5, pp. 1292-1314. https://doi.org/10.1108/IJOEM-11-2019-0921

Publisher

:

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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